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Consumer Equilibrium In Case of a Single Commodity – Utility Analysis

Consumer Equilibrium In Case of a Single Commodity

(a) MEANING OF CONSUMER’S EQUILIBRIUM Equilibrium means state of maximum satisfaction.

Consumer’s equilibrium is a situation when he spends his given income on purchase of one or more commodities in such a way that he gets maximum satisfaction and has no urge to change this level of consumption, given the prices of commodities.

(b) CONDITION OF CONSUMER EQUILIBRIUM IN CASE OF SINGLE COMMODITY Consumer will be in the state of equilibrium when following condition is fulfilled:

Marginal utility of commodity ‘X’ in terms of rupees is equal to the price of commodity ‘X’ in rupees. [MUx (in Rs.) = Px (Rs.)]

Or

Mux (in utils) = Px (in Rs.) or MU of Commodity ‘X’ (in utils) = Px in Rs)
MUm (in utils) MU of Money (a rupee)(in utils)

(c) HYPOTHETICAL SCHEDULE/ NUMERICAL EXAMPLE Let us take the example of Fruit Ice-cream. Price of an ice-cream Scoop is Rs.30 and MUm i.e. MU of money (Re 1) = 1 util.

Units Consumed

MU of

Ice-cream Scoop

(in utils) {a}

MU of Money

(Re 1)

(in utils)

{b}

MU of

Ice-Cream Scoop

(in Rs.)

= {a}/ {b}

Price of

Ice-Cream

Scoop

(Rs.)

1

2

3

4

5

50

40

30

20

10

1

1

1

1

1

50

40

30

20

10

>

>

=

<

<

30

30

30

30

30

(d) EXPLANATION AND CONCLUSION In the given example, level of Consumer’s Equilibrium is 3 units
where,
MU of Ice Cream in rupees = Price of Ice Cream in rupees i.e. Rs.30.

  • Before this level i.e. at 1st and 2nd level, MU > Price i.e. benefit is more than cost. So, consumer will increase consumption to attain equilibrium.
  • After this level i.e. at 4th and 5th level, MU < Price. i.e. benefit is less than cost. So, consumer will cut or decrease consumption to be in the state of equilibrium. Only at the level of 3 units, condition of consumer’s equilibrium is fulfilled.
  • A consumer will consume that much quantity at which MUx = Px to be in the state of equilibrium.

Lets Practice

1. If MUx> Px the consumer
  1. Has reached the equilibrium
  2. Has started incurring losses
  3. Can consume more of X
  4. Must stop consuming X

View answer

Answer: Can consume more of X

2. A consumer gets maximum satisfaction where the ____________are same.
  1. Total utility and marginal utility
  2. Price of commodity and marginal utility
  3. Price of commodity and total utility
  4. (a) and (b) both

View answer

Answer: Price of commodity and marginal utility

3.Equilibrium means state of maximum _____________ ?

View answer

Answer: Satisfaction